Some legislators who we have criticized for voting yes on HB 331 posted a link yesterday to a response to an earlier piece we did on the subject, presumably because they think the response rebuts our criticism of their vote.
It doesn't.
We can sort of understand the initial inclination to interpret it in that way. The title is Follow-up: HB 331 is Still a Good Deal. But those reading the article quickly understand that the title really is "HB 331 is a good deal ... if you do certain things."
As it was constructed when those legislators voted for it -- and remains to this day -- HB 331 doesn't do those things. Without them, even the response effectively admits HB 331 results in "a net negative to the state."
After working through some initial Latin, here is what the response says:
What if, rather than budgeting based on what the state needs, the legislature budgets to a target amount of spending?
That would lead to a real problem. Now, rather than reducing the budget and keeping the extra money in the bank to earn interest, the legislature instead views the reduced budget as an excuse to spend that money in another way.
If that’s the way this whole thing plays out, throw my previous analysis out the window.
Some argue that this is basically what happens with the POMV draw created by SB 26. The legislature will view that calculation as the amount they should spend, rather than the amount they can spend.
If we are going to take on debt under the pretense that the debt service will be paid with the interest on the savings, we need to protect those savings. Otherwise we may end up with an empty savings account and a debt service payment on top of it.
Even if the discount on the face of the certificates warrants the bill on its own, the financial implications are a net negative to the State if those savings are wasted. Which means that, at least in my mind, the passage of this bill relies upon the fact that it reduces the budget and those savings are saved.
The problem? HB 331 doesn't provide in any way protections "that it reduces the budget and those savings are saved." And as the response admits elsewhere, the history of the legislature with respect to issues related to fiscal responsibility "isn’t great." In short, this isn’t an issue on which a legislative “trust me” deserves much weight.
As did our initial piece, the response goes on to list certain ways that HB 331 might be amended, or otherwise parallelled by other actions, potentially to provide the needed protections. Those are the certain things that, "if" done, potentially could help make HB 331"a good deal." (In our view, there are other risks beyond those that still could make it a bad deal, but at least the number of risks would be reduced).
But, again, none of those were contained, proposed or even discussed at the time the House voted on HB 331, and at least to this point still haven't. Without them, there is a high risk, and given the legislature's history, some (including us) might even say a virtual certainty that this or future legislatures will use the reduction in current spending levels created by the approach as an opportunity to increase spending in other areas.
Indeed, some might suggest that this Legislature already is doing so with its proposed increase in K-12 spending.
If this or future legislatures do? In the words of the response,"the financial implications are a net negative to the State."
Moreover, even if the additional things outlined in the response are done this session in an effort to salvage HB 331, they easily can be undone. Under the Supreme Court's recent decision in Wielechowski v. State, 403 P.3d 1141 (2017), each year during the appropriation process the legislature can revise and reshuffle the manner in which funds are appropriated, even if contrary to statute.
As a result, even if the legislature were to reduce the POMV draw as we suggested in our initial piece and is repeated in the response, or set aside the requisite amount of funds in the Alaska Capital Income Fund or a separate subaccount of the Permanent Fund corpus with a firm commitment to direct the proceeds (and the appropriate part of the accumulated earnings) from that subaccount only to repayment of the debt (both of which are suggested in the response), nothing prevents either the very next or a subsequent Legislature as a part of the appropriation process from redirecting — directly or through various accounting tricks — all or a portion of those funds right back into the general fund to help pay for other things.
While some attempting to defend HB 331 may seek to dismiss or minimize the potential for such actions, the current Legislature's own use of so-called designated funds for other purposes and current reappropriation of past capital appropriations to other projects provides more than ample evidence of behavior along these precise lines.
The consequence if this or a subsequent legislature did so? Any such steps -- whether direct or indirect -- would immediately increase the cost of HB 331 to future Alaskans to the levels we discussed in our initial piece (depending on when they occurred, potentially up to a net negative of $940 million).
To be clear, we recognize that the state has an obligation to pay off the oil credits which qualify for cash purchase. But the state already has a statutory mechanism in place for dealing with those. While that mechanism comes with a cost, it is both one to which those seeking such payments agreed at the time they entered into the oil credit program and one which, based on current projections, has an end date with largely known costs in the relatively near future.
Even under the best case scenario outlined in the response, the alternative proposed by HB 331 bears a substantial risk of increasing those costs significantly more over the lifetime of the bonds if the required safeguards necessary to its success either are not put in place from the outset by the current Legislature or ignored by future ones.
Those safeguards aren't contained in the current bill and, in passing SB 26 (the POMV bill) without a deduction mechanism, one opportunity for doing so has already passed. As we outlined in our initial piece -- and as the response effectively concludes as well -- without them the so-called "good deal" quickly can -- and given the past behavior of the legislature, likely will -- become a very bad deal for Alaskans.
Last week on the eve of the House Finance Committee meeting and subsequent House floor debates on HB 331 -- the bill authorizing the issuance of state bonds to pay for oil tax credits -- a new analysis emerged asserting that the bonds might be a "good deal" for Alaska. Bonding for Tax Credit Purchases may be a Good Deal for Alaska (May 2018).
The analysis claimed that, by issuing bonds and using them to pay the oil credits currently, the state might "make" as much as $600 million on the "spread" between earnings on the amounts that the state would have paid out currently in credits but was able to defer because of the bonds, and the amount of interest owed in paying the bonds back.
The analysis was immediately adopted and hailed by proponents of the bill during both the Committee and House floor debates, and picked up and repeated by some blogs.
But the analysis is built on a number of assumptions and in the din of the week, one particularly important assumption went missing.
That assumption is that, in the current and subsequent years, the "savings" produced by using the bonding approach -- that is, the difference between the amount that would have been spent to pay off the credits under the current statute and the amounts due on the bonds -- will be retained in the Permanent Fund earnings reserve and not spent on other things.
In other words, if during the period the bonds are projected to produce a savings (roughly FY 2019 - FY 2023) the budget otherwise would be $4.5 billion with $0.2 billion paying the credits, then the budget needs to be reduced to $4.3 billion (the difference in the spending between the statutory and bonding approaches), with the difference not spent on other things.
Anyone who has been around the legislature for any period of time knows it is highly unlikely that the legislature can exercise that level of constraint. If there is current money available, the legislature will find someplace to spend it.
Certainly, a commitment to exercise such constraint is not contained in the statute, and went unmentioned in the Committee and floor debate.
What happens if the legislature does not exercise the constraint? Bad things. Instead of the bonding approach "making money" for Alaskans (compared to the current, statutory approach), it will lose even more of it.
To measure the potential effects we extended the calculations done in the original analysis.
Here are the results from the original analysis. Under the assumptions made in the analysis, the results show that the bonding approach potentially could result in retaining ("making") an additional $623 million ($1.301 billion, minus $678 million) over the life of the program.
But here are the results if, instead of saving the differences between the amounts "Appropriated for Next Year Credit Purchases" (the payments due under the current statutory program) and "Debt Service Payments Required for Next Year" (the payments due under the bonding approach), the legislature spends all or a portion of them.
If the legislature spends all of the savings on other things, the state loses $940 million over what it is obligated to pay under the current, statutory program (the difference between the $678 million FY 2031 balance under the statutory formula, and the -$262 million FY 2031 balance if all of savings are spent on other things).
Even if the legislature only spends 50% of the savings on other things, the state still loses $96 million over what it is obligated to pay under the current, statutory program (the difference between the $678 million FY 2031 balance under the statutory formula, and the $582 million FY 2031 balance if 50% of the savings are spent on other things).
In short, if the legislature is unable to restrain itself from spending the "savings" on other things, from a fiscal perspective the state will end up even worse off than complying with the current statutory repayment approach.
When approached about these results one legislator who voted for HB 331 this past week said that he "hoped" future legislators would be able to exercise the necessary constraint.
But such past "hopes" are how the state has found itself in the fiscal shape it is now. And relying on the same "hope" going forward will quickly result in turning what some claim is a "good deal" for Alaskans into an even worse one than we have now.
In the past some in the Senate have claimed that in order ultimately to instill fiscal discipline the state needs to reduce the revenue it has to spend. That hasn't seemed to work too well in the past; when it hasn't had current revenue, the legislature has simply drawn down savings more.
But giving some weight to that view here is one way the legislature could demonstrate it is somewhat committed to saving the amounts assumed in the earlier analysis.
Under SB 26, the legislature proposes to limit the annual draw on the Permanent Fund to approximately 5% of the fund's value. Assuming an average value of roughly $50 billion, that results in an annual draw of roughly $2.5 billion.
If the legislature is committed at least to attempting to turn the bonding approach into a "good deal" for Alaskans it could agree to limit the draw to 5% of the fund's value, minus the annual savings projected to be achieved by the bonding program.
At least in the first instance, doing so would leave in the earnings reserve the amounts necessary under the analysis to achieve the potentially "good deal." Of course, nothing would prevent the legislature from end running the limitation by making a separate, additional draw on the earnings reserve in future years or by achieving the same objective through making an additional draw on the amounts remaining in the CBR.
But at least that step would demonstrate some recognition of the issue and some commitment to taking it seriously.
On the other hand, following in the footsteps of the House and failing to make even that minimum commitment will demonstrate that HB 331 is really about something else (i.e., providing an additional state subsidy to certain oil companies) and the legislature is fine with it ending up costing Alaskans even more than the current statute provides.
